TAX UPDATE TAX ISSUES YOU NEED TO Hamilton Law Association 15th Annual Estates & Trusts Seminar Michael C. Morgan SimpsonWigle LAW LLP February 9, 2017 Agenda Introduction 2016 ITA new era of tax rules re Taxation of Estates and Testamentary Trusts Concept of graduated rate estate Exception to elimination of graduated tax rates for estates and testamentary trusts Introduction 2016 ITA new era of tax rules regarding Charitable Donations by Estates Charitable donations made as a consequence of death Increased flexibility re utilizing charitable donation tax credit Introduction October 2016 proposed amendments to ITA tax rules re Principal Residence Exemption Particularly with respect to personal trusts Limitations to access the principal residence exemption (PRE) 1
Proposed Amendments to the Principal Residence Exemption (PRE) Rules With respect to Principal Residence held by a Personal Trust Notice of Ways and Means Motion October 3, 2016 Current PRE Rules Requirements for claiming the PRE Specified beneficiary who ordinarily inhabits the residence property Trust must make designation re specified beneficiary for each year Proposed amendments Limitations re claiming the PRE Narrowing the scope of eligible trusts to claim the PRE Restrictions on eligible trusts only 3 types of personal trusts Post-2016 PRE claiming by non-eligible trusts Formula 2 components of capital gain to be calculated Problematic Issues arising from Proposed Amendments to the PRE Rules (as they impact Personal Trusts) Proposed scope of eligible trust is too narrow Creates practical problems for estate planning Potential difficulties in second marriage situations (re the proposed limitation(s) to spousal trusts ) Potential difficulties with the proposed limitation to a Qualified Disability Trust Potential difficulties with the proposed limitation(s) to trust for minor children Suggested revisions to the proposed amendments STEP Canada Tax Technical Committee suggestions 2
Additional proposed amendments to the PRE Rules Confining access to the additional year ( one plus factor) to Canadian residents (individuals and trusts) Reassessing beyond the Normal Reassessment Period for unreported real estate dispositions Limiting the application of subsection 107(4.1) ITA where subsection 75(2) ITA applied to a Trust Requirement to report a disposition of a Principal Residence on tax return Mandatory requirement for individuals (starting in 2016) Personal trusts continue to be required to report a disposition of a principal residence The New Era of Testamentary Trust Tax Rules To eliminate the tax-motivated use of testamentary trusts Elimination of graduated rates for testamentary trusts, except for Graduated Rate Estates and Qualified Disability Trusts Problematic Issues arising from the New Testamentary Trust Tax Rules Death of life interest beneficiary of an existing testamentary life interest trust (e.g. testamentary spousal trust) Use of multiple Wills and limiting of relieving provisions in new tax rules to graduated rate estates Proposed solutions January 2016 legislative proposals 3
The New Era of Tax Rules regarding Charitable Donations by Estates Charitable donations made as a consequence of death More flexibility re claiming of charitable donation tax credit for donations by estates Problematic Issues arising from the New Era of Tax Rules re Charitable Donations by Estates Possible stranding of charitable donation tax credits Gifts transferred to charitable organization(s) after estate ceases to be a graduated rate estate Proposed solutions January 2016 legislative proposals Status of Graduated Rate Estate CRA position Testamentary spousal trust not a graduated rate estate Taxation Year of Graduated Rate Estate CRA position 36-month GRE period (but can be 4 tax years) Donation of Private Corporation Shares and/or Real Estate Federal Budget 2015 proposal re capital gains treatment Federal Budget 2016 decision to not proceed Summary Draft legislation to address the potential difficulties with the new rules 4
Summary October 2016 draft amendments would substantially modify the ITA rules re accessing the principal residence exemption (for individuals and for personal trusts) January 2016 new rules re taxation of estates and testamentary trust and new rules re taxation of charitable donations by estates ( as a consequence of death ) January 2016 draft legislation would modify somewhat the potential difficulties with the new rules re taxation of estates and testamentary trusts and the new rules re taxation of charitable donations by estates Impact on estate planning going forward Thank you! Michael C. Morgan Counsel - Tax SimpsonWigle LAW LLP 390 Brant Street, Suite 501 Burlington, Ontario L7R 4J4 Tel: 905.333.3960 Toll-free: 1.800.434.4414 Fax: 905.333.3960 Email: MorganM@simpsonwigle.com 5